In 2009 a fairly constant refrain heard as companies reported better than expected earnings was "but they are doing it on lower sales". Now as we kick off the first 2010 earnings season, Alcoa had higher sales but missed the profit estimate. This caused the market to have a small correction, although of course other factors were in play.
The objective of any business is to make money, otherwise it is a hobby. There have been many many cases of businesses that expanded so much on credit that ultimately they were forced into bankruptcy. Having more market share or sales without more profit is not a path to success.
Clearly the ideal company would grow both. The best way to do that of course is to make sure you have a secure business model and expand only when it is clearly justified. Some executives and companies start to think that bigger is better and do whatever they can to expand (including reducing margins). The strategy here is to become so large that competition becomes irrelevant and they can then increase margins. This strategy has a number of issues, and can lead to being over leveraged.
The contraction has left many companies smaller than they were. The ones that have adjusted to this and eliminated significant costs have profited and will continue to profit. Owning stock is owning a piece of a company, and if that company is making money, the share ultimately will reflect that. Profits are the goal.
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